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My interview Razor Sharp 18 February
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My interview Razor Sharp 11 February 2014
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Time for a House Un-Australian Activities Committee?
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Project Wickenby – an international tax failure?

Project Wickenby is Australia’s international anti-tax evasion operation. It is a failure.

After almost five years and with about $200 m of the proposed $300 m of taxpayer money already spent, the sum total of successful prosecutions for international tax evasion coming out of the multi agency Wickenby task force to date is now 3. And the culprits all confessed.

Glen Wheatley, the first conviction, received a 15 month jail sentence. Not unreasonably he now seems to be having regrets about co-operating. He must be thinking he may not have been convicted without confessing or at least that the time he spent in jail would have been the same without a confession.

Another target is Paul Hogan.  Like Hogan, many of those apprently under investigation are going to use their considerable wealth to fight both the tax and/or criminal investigations.

We need to draw a distinction between Wickenby criminal investigations and Wickenby tax investigations. Nevertheless the two are intertwined and it is appropriate for taxpayers to ask if we are getting value for money in both convictions for evasion, and revenue for evasion, fraud and avoidance. The answer so far appears to me to be no.

The Commissioner of Taxation put out a statement after the most recent convictions warning people against international tax evasion. In the words of Mandy Rice-Davies, he would say that wouldn’t he?

But seriously, 3 convictions after almost five years and $200 million might make some people think that the chances of being identified, let alone successfully prosecuted, are extremely slim.

According to the Commissioner of Taxation, to date there have been 23 criminal investigations and 28 people have been charged on indictable offences. The ATO has completed 249 tax audits (without any indication of how many have been marked No Further Action or are for piddling amounts.)

So how much tax has been collected? The Commissioner says $79 million. After 5 years!

Taxpayers should quite rightly ask, what the hell are these agencies doing with our $300 million? Why so few results to date? Maybe our senators should be a little more rigorous about Wickenby when the Commissioner of Taxation or the head of the Australian Federal Police or the Australian Crime Commission next appear before Senate Estimates.

For example it takes only a few minutes on the net to find the email address of the partner in the Swiss firm whose computer Australian authorities seized. The information gained from his computer prompted the establishment of Project Wickenby.

After five years why has this operative not been charged? Indeed, is he going to be charged?

Let’s look at Australia’s integration into the world economy. Foreigners hold about $1.5 trillion in Australian assets. That figure is growing by almost $180 bn a year. Australians have just under $1 trillion in assets offshore, and that is growing by about $130 bn a year. So in total, investment flows between Australia and other countries are over $300 bn a year.

Cross border income and capital gain flows total about $400 bn year.

Flows between Australia and tax havens are $40 billion a year in both directions.

Yet the ATO employs only about 80 people in its peak international area, International Strategy and Operations (and that’s about half the number of a few years ago). You’d find more people employed in a large sized super market. 80 people to deal with the tax consequences of $300 bn in investment flows, $400 billion in income flows and $2.5 trillion in cross-border asset holdings just doesn’t make sense.

Given the huge amounts of investment into and out of Australia, and the large flows both ways each year of income and capital gains, how many more Wickenbys are there? Indeed, how would the Commissioner of Taxation or the ACC or the AFP ever know?

So far the Wickenby successes, such as they are, seem to be based on two factors. The information coming out of the computer of the Swiss operative and the arrest of a Vanuatu adviser only came about because the people in question came to Australia.

It is a lesson other advisers operating from tax havens will learn.

The information about one bank in Lichtenstein came from a disgruntled employee who sold account details to revenue authorities. There are 35 banks in Lichtenstein alone. There are 39 countries with bank secrecy. Relying on disgruntled employees to sell secret information, or hoping promoters come to Australia, is hardly a strategy. It is a response.

Reactive responsiveness is not success; it is merely cleaning up after the bomb has gone off. The real point should be to stop the fiscal suicide bombers before they blow us up.

It was General Douglas Macarthur who famously said that the history of the failure of war can almost be summed up in two words: too late. These words describe Wickenby.

For example it was not until 2003 – twenty years after Hawke and Keating began the process of integrating the Australian economy into the world economy – that the various criminal and regulatory agencies like the Australian Crime Commission, the AFP and the ATO began to co-operate on combating international tax evasion. Twenty years!

We taxpayers are spending $300 m on Wickenby to supposedly get $300 million back. Why bother?

Well, there is a reason. The project is aimed not just at retribution against alleged wrong doers. It is about influencing taxpayer behaviour. Sending Glen Wheatley to jail supposedly sends a clear message to the community – the ATO and its partners can and will catch those who abuse cross border arrangements to evade Australian tax.

Circling around high profile Australians certainly increases the publicity about Wickenby. That sends a powerful message to Australian taxpayers. Not even Australian icons are beyond the ATO’s net.

But there are a number of problems with this “crucifixion will ensure widespread compliance“ approach.

First, you’ve got to get your man. Second, you might turn the victim into a martyr – the little Aussie battler fighting Big Brother.

In fact this high profile approach might alert others to the dodges, and make them think they are a little smarter or more devious and can get away with it.

Taxpayers fund the Australian Taxation Office with almost $3bn. We get back a bit under $300 bn. In other words for every dollar invested, we get $100 back. That’s a pretty good return on investment and stacks up very well internationally. The figure for compliance activity is more like 10 dollars for every dollar invested in the ATO.

Without denigrating the ATO and its overworked workers a drover’s dog could collect most of that. It is the $4 to $8 bn in revenue that the ATO raises annually through compliance activity and the thin blue line effect this creates that is important. The ATO is the cop on the beat supposedly stopping fiscal anarchy.

There are 39 tax havens, most with bank secrecy. 32 are co-operating with the OECD and are entering into bilateral tax information exchange agreements with various countries but the pace is glacial. Since 2004 for example Australia has signed just 4 such agreements.

Even the OECD accepts that the pace is too slow. The OECD needs to attack the real culprit – bank secrecy – at its heart. And that heart is OECD member Switzerland. There are veiled threats against Switzerland in the latest OECD communiqué on improving transparency and stepping up exchange of information in tax matters. Too late.

It is time to take the gloves off and impose sanctions not just on non-cooperative tax havens and those tax havens dragging their feet on co-operation (most of whom rely heavily on the income from trading in bank secrecy) but also on Switzerland and other OECD members (Austria and Luxembourg spring to mind) whose record on transparency is less than perfect.

I have no problems with tax havens per se. I have a problem with bank secrecy and the routing of mobile capital through havens to stop the ATO and other tax authorities gaining access to information for tax purposes.

Another problem. Wickenby is about crude evasion schemes.

How is the ATO (if at all) dealing with sophisticated international tax avoidance schemes, the ones big and now not so big business might engage in? Again, with so much money involved, I suggest there is a lot of low hanging fruit out there the Commissioner could easily pluck. He doesn’t.

He concentrates on some international areas (like transfer pricing and cross border arbitrage arrangements), but are they at the expense of or in competition with other fruitful areas within international tax such as the attribution regimes?

Despite five years of international tax reform the ATO has undertaken little international tax compliance activity outside its comfort areas like transfer pricing.

The financial implosion going on in the US and spreading to the rest of the world and into the real economy will only exacerbate the desire to find safe havens (pun intended). The decline in profitability will put pressure on people to reduce costs including tax. Globalisation plus recession means people will be tempted (almost forced to from the point of view of some businesses) to indulge in more Wickenbys or, perhaps for those at the big end of town and larger SMEs, sophisticated avoidance techniques.

Evasion is the poor man’s tax avoidance.

There is another problem here. The ATO is, like all other Commonwealth public service agencies, hamstrung by the stupidity of the efficiency dividend and the non-supplementation of wage increases. The ATO appears to be addressing these crude cost cutting measures by adopting a henny penny approach. The sky is falling in, the Commissioner cries, so give us more money to hold up the sky!

The problem is that the money provided is then locked in to specific projects and, while they might be important, this means that other priorities cannot be addressed adequately. Surely a better approach would be to fund the ATO adequately to improve compliance, including international tax compliance. After all a return of ten to one from compliance activity will result in much more revenue.

Some basic ATO responses? Begin to understand at the highest levels of the organisation the importance of globalisation to the Australian economy and its impact on the Australian tax system. Clearly the ATO needs to respond to that in a more systemic way.

Increase staff in the peak international body and help re-establish morale there. Train ATO staff on international measures. Re-design information collection from business. (It is a joke frankly). Boost international economic tax risk areas.

What can politicians do? Set up a Senate enquiry into tax havens and tax cheats at the high end of town along the lines of the US Senate which recently questioned Frank Lowy’s son (a US citizen) about Lichtenstein. Abolish the tax secrecy provisions in these enquiries. (In fact the Senate probably already has the power to request information from the ATO and make it public; it just doesn’t ask.)

And a plea to the Commissioner of Taxation. Stop hiding behind spin when it comes to Wickenby. Tell us the full story. Don’t just put figures out into the public arena without proper explanation of what they mean. How many successful Wickenby audits have there been? Why is the tax collected under Wickenby so low ($79 m) compared to the $207 million in liabilities raised? How did you determine improved tax compliance of people reviewed under Wickenby to be $70m? Are there any discernible flow on effects of improved international tax compliance among non-Wickenby taxpayers?

Why so few successful prosecutions to date?

And the biggie. How many more Wickenbys are there?

While this latter question may sound a bit Rumsfeldian I think the ATO has sophisticated enough analysis techniques to tell us how many known unknowns there are.

Finally the Australian Government should, working with the OECD, impose sanctions from 1 July 2009 on bank secrecy countries which don’t meet transparency and information exchange standards, starting with Switzerland.

An edited version of this article appeared in the 4 November 2008 edition of the Public Sector Informant in the  Canberra Times. I hope to be writing more articles in the future about tax administration for the Informant.



Pingback from Auto Industry Bailout » Blog Archive » En Passant » Project Wickenby – an International Tax Failure?
Time December 30, 2008 at 1:35 am

[…] Set up a Senate enquiry into tax havens and tax cheats at the high end of town along the lines of the US Senate which recently questioned Frank Lowy’s son (a US citizen) about Lichtenstein. Abolish the tax secrecy provisions in these …[Continue Reading] […]